Pro-poor Response to the Fiscal Crisis

By Antonio Tujan, Jr. and Arnold Padilla, IBON August 2004

The challenge for the Arroyo administration is how to unite the various sectors in supporting the campaign of the President to tame the fiscal crisis. The admission of the President that the country is in the midst of a fiscal crisis following the report of the University of the Philippines (UP) School of Economics was meant to achieve this. But is unity possible under an anti-poor response to the fiscal crisis?

The challenge for the Arroyo administration is how to unite the various sectors in supporting the campaign of the President to tame the fiscal crisis. The admission of the President that the country is in the midst of a fiscal crisis following the report of the University of the Philippines (UP) School of Economics was meant to achieve this. But is unity possible under an anti-poor response to the fiscal crisis?

Popular support

The declaration of the President was meant to create public alarm and gain popular support for the new taxes that government wants to impose. It was meant to pressure Congress to give the President emergency powers to better steer the country during a ‘state of fiscal crisis.’ However, the admission did not achieve its desired result but only caused further speculation in the economy. The foreign exchange rate slid back to $56: P1 while the stock market faltered and the banks’ risk premium increased. Legislators opposed to the new taxes including those who supported the President last May elections have remained firm in their position. The proposal for an emergency power was shot down at once.

Burden sharing

Malacañang and the UP School of Economics harp on unity and ‘burden sharing’ among government, the business sector, and the ordinary folk to find a meaningful solution to the fiscal crisis. But for the poor, it is not acceptable not only because they cannot bear any longer the burden of rising cost of living, unemployment, and low income. The measures being proposed by the President and the UP School of Economics actually pass most of the burden to the people. A correct understanding of the root of the fiscal crisis is required if government seriously wants long-lasting solutions. This also enables government to design short-term measures that are more acceptable and more pro-people.

Debt management

The most important first step to address the fiscal crisis is a review of government’s debt management. Government looks at debt as an instant remedy rather than the root of its fiscal woes. In fact, even as the President recognized the fiscal crisis, government continues to borrow heavily from foreign creditors. Between March and July, foreign debt has jumped from more than $56 billion to almost $61 billion. In the first half of the year, foreign loans comprised 37% of gross borrowings. The original target was only 16 percent. This worsens the fiscal position of government since its debts get more exposed to currency fluctuation.

Meanwhile, automatic debt payment bleeds the public coffer dry. The proposed debt service for 2005 is P646 billion compared with P10 billion for health and P112 billion for education. Malacañang should endorse current efforts in Congress to review how government manages its debts.

At a time of fiscal crisis, it is more necessary to impose a cap on borrowings and payments so government can have more flexibility in managing the people’s money and protecting the people’s welfare. If the Arroyo administration can only muster enough political will, it can negotiate with the country’s creditors to reduce some of our debts. Government must re-negotiate onerous debts like the P500-billion debt of the National Power Corporation (NAPOCOR) to lessen its impact.

Customs collections

With a debt cap easing the fiscal hemorrhage, government can look for ways to raise additional revenues and reduce the budget deficit. But government does not need to impose new taxes that are regressive and anti-poor like the P2 per liter increase in specific tax on oil products and the two-step hike in value added tax (VAT). Instead government must raise its customs collections by increasing the tariff levels of agricultural and industrial imports that have been liberalized under the World Trade Organization (WTO). Since 1996 (the first year of the WTO), the Bureau of Customs’ (BOC) tax to GDP (gross domestic product) ratio has progressively decreased from 4.8% to 2.4% in 2002.

Investment perks

The Arroyo administration can also reduce the incentives it gives to attract foreign investors. The Department of Finance (DOF) recently reported that the country waived P229 billion in potential revenues last year due to the numerous tax breaks and duty exemptions granted to businesses. Even if government suspends 50% of these perks, the Bureau of Internal Revenue (BIR) and the BOC can still collect around P165 billion.
The Department of Trade and Industry (DTI) is now reviewing the incentive packages of the Board of Investment (BOI) and the Philippine Export Zone Authority (PEZA). The DTI should focus on the perks of big foreign corporations and maintain the incentives for small local businesses.

Plug leakages

Another doable measure to improve the country’s revenues is to plug the leakages in the tax collection system. Estimates show that uncollected revenues from interest income tax, documentary stamp tax, gross receipt tax, excise tax on tobacco products, value added tax, individual and corporate income tax reach more than P179 billion.

If the BIR can recover even 50% of this uncollected amount, it still translates to almost P90 billion-- P10 billion more than what government projects it can collect from the new tax measures.

Another estimate, meanwhile, says that a measly 1%-improvement in our tax collection effort (tax to GDP ratio) means P32 billion more revenues for government.

Unity means pro-poor

The fiscal crisis hurts the poor Filipinos more than it hurts the rich and the big corporations. A fiscal crisis means that the resources of government are so drained that it can no longer fund social services and development projects for the poor. Thus, asking the poor to pay more taxes so that we can get out of the crisis is doubly unjust. Only under a pro-poor management of the fiscal crisis will make Filipinos rally behind the Arroyo administration during this difficult time.

IBON Features
Bulatlat

© 2004 Bulatlat ■ Alipato Publications